Clawback Policies Vary by Company, Industry: PwC

In anticipation of new regulations, companies have instituted a wide range of so-called clawback policies, with no two exactly alike, according to a report issued to clients on Thursday by PricewaterhouseCoopers LLP.

PwC studied 100 large companies with clawback provisions from 2009 through 2012. The firm found 92 allowed a clawback following a restatement. Of those, about three-fourths require proof that the employee caused or contributed to the incorrect financial reports.

What spurs a clawback varies. For instance, 84 companies said misconduct was a trigger, while only 44 specified fraud and just 16 said negligence was a reason to come after an executive’s past pay.

Triggers also range by industry. More than 70% of energy companies have a fraud clause, while 13% of insurance companies do. Meanwhile, all the energy and healthcare companies warn executives about misconduct and excessive risk, but those were popular with just 63% of entertainment, media and communications companies.

Clawbacks are rare on Wall Street, even where policies exist and misconduct was found. J.P. Morgan Chase & Co. famously clawed back pay from traders involved in the “London Whale” fiasco.

PwC said it is unclear if the dearth of actual clawbacks is because of lax companies or well-behaved employees. But clawbacks are “meant to be rare,” because the events that trigger them are by their nature rare, said Ken Stoler, a partner and co-author of the study.

The firm found many companies modified their clawback provisions after the Sarbanes-Oxley reforms of 2002, and others indicated the policies may change when the new SEC rules are finalized.

But the firm urged companies to be careful with modifications. Adding performance metrics to clawbacks could turn them into criteria for bonus awards, and in that case “the accounting implications could be significant,” PwC said.

Also, giving the board too much flexibility or discretion about what constitutes a trigger and how much to recoup could also be problematic. It could lead auditors to determine the arrangement was “not established and understood,” so the confiscated stock awards would have to be valued on a mark-to-market basis.

“This,” the firm said, “is a complex area and significant judgment is often required.”

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